Good day, everyone. And welcome to the Global Partners' Third Quarter 2018 Financial Results Conference Call. Today's call is being recorded. There will be an opportunity for questions at the end of the call. [Operator Instructions]

At this time, I would like to turn the call over to Mr. Faneuil for opening remarks. Please go ahead, sir.

Edward Faneuil

Good morning, everyone. Thank you for joining us today. Before we begin, let me remind everyone that this morning, we will be making forward-looking statements within the meaning of Federal Securities Laws. These statements may include, but are not limited to, projections, beliefs, goals and estimates concerning the future financial and operational performance of Global Partners.

Estimates for Global Partners’ EBITDA guidance and future performance are based on assumptions regarding market conditions, such as the crude oil market, business cycles, demand for petroleum products including gasoline and gasoline blend stock and renewable fuels, utilizations of assets and facilities, weather, credit markets, the regulatory and permitting environment and the forward product pricing curve, which could influence quarterly financial results. We believe these assumptions are reasonable given currently available information and our assessment of historical trends.

Because our assumptions and future performance are subject to a wide range of business risks and uncertainties, we can provide no assurance that actual performance will fall within guidance ranges.

In addition, such performance is subject to risk factors, including but not limited to, those described in our filings with the Securities and Exchange Commission.

Global Partners undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements that may be made during today's conference call. With Regulation FD in effect, it is our policy that any material comments concerning future results of operations will be communicated through news releases, publicly announced conference calls or other means that will constitute public disclosure for the purposes of Regulation FD.

Now, please allow me to turn the call over to our President and Chief Executive Officer, Eric Slifka.

Eric Slifka

Thank you, Edward. Good morning, everyone. And thank you for joining us. As I noted in our earnings release this morning, our segment results for the third quarter reflected a strong performance in the Gasoline Distribution and Station Operations segments as product margin increased 14% to $148.6 million with the same period in 2017, driven by our acquisitions of Champlain and Cheshire Oil in Q3, and the purpose of Honey Farms in Q4 of last year.

We're pleased with the performance of these gas stations and convenience stores which demonstrate our strategic focus on making complementary acquisitions in markets that leverage our terminal assets, enhance synergies, drive economies of scale and expand our retail footprint.

In our Wholesale segment, product margin was down year-over-year due to unfavorable market conditions. Our results in Q3 '17 significantly benefited from weather-related supply disruptions. Q3 '18 did not experience similar disruptions, which was a key reason for the margin decline.

As I noted in this morning's release, the fundamentals of our business are strong and we are increasing the lower end of our full year 2018 EBITDA guidance by $5 million.

Turning to our distributions, in October, we announced both a quarterly distribution on our common units and the initial quarterly distribution on our Series A preferred units. The common unit distribution of 47.50 per unit will be paid on November 14th to unitholders of record as of November 9th. The Series A distribution of 66.35 per unit will be paid on November 15th to holders of record as of the opening of business on November 1st.

In closing, we continue to capitalize on our expertise in acquiring, integrating and operating assets. Looking ahead, we remain focused on driving growth through organic investments and strategic M&A.

With that I'll turn it over to Daphne for her financial review. Daph?

Daphne Foster

Thank you, Eric. And good morning, everyone. Turning to our results, gross profit in the third quarter decreased $15.1 million to $135 million. This was due to less favorable market conditions in our Wholesale segment, primarily in gasoline and gasoline blendstocks, partly offset by improved margin in our GDSO segment. Combined, product margin was down $15.1 million to $157.2 million.

Operating expenses increased $13.5 million to $83.8 million in the quarter. This reflects the three retail gasoline and convenience store acquisitions we have made over the past year, with their associated headcount, real estate taxes, rent, utilities and maintenance expenses.

In addition, the increase in gasoline prices resulted in higher credit card fees year-over-year. SG&A expenses in Q3 increased $2 million to $42.1 million due to $3.7 million in acquisition costs associated with Champlain and Cheshire, partly offset by decreases in accrued and incentive comps and professional fees. You'll notice that our third quarter financials include a gain of $3.5 million related to railcar lease, exit and termination expenses. This relates back to the voluntary early termination of a railcar sublease with a counterparty in December of 2016 and the fleet management services agreement with that counterparty, pursuant to which we agreed to provide future railcar services. At that time we accrued the incremental costs associated with our obligations. The early return of 500 of those railcars in 3Q '18 released us from the future obligation to service these cars resulting in a $3.5 million reduction in the remaining accrued incremental costs.

Interest expense was $22.6 million in Q3 2018 compared with $20.6 million in the year earlier period. This was due to increased revolver borrowings related to our acquisitions, higher working capital borrowings related to an increase in inventory and higher interest rates. Net loss for the third quarter was $14.1 million compared with net income of $14.9 million in the same period in 2017. EBITDA was $35.8 million compared with $60.8 million in the same period in 2017. Adjusted EBITDA was $37.2 million in the third quarter of 2018 compared with $63.8 million in the third quarter of 2017. EPS was $5.3 million compared with $32.3 million in the same period in 2017. These results included a net loss on sale and disposition of assets and a net goodwill along with asset impairment of $1.3 million and $3 million in the third quarter of 2018 and 2017 respectively. TTM distribution coverage at the end of 3Q was 1.8 times.

Turning to our segment detail, GDSO product margin in 3Q ‘18 increased $17.9 million to $148.6 million. The gasoline distribution contribution to product margin was up $7.1 million to $91.3 million in the third quarter of 2018 primarily due to the acquisitions of Champlain and Cheshire Oil as well as Honey Farms partly offset by the sale of non-strategic sites. The average fuel margin per gallon in the quarter improved about a $0.01 to $0.215 per gallon from $0.205 per gallon in last year's third quarter. Station operations product margin which include convenience store sales, sale of sundries and rental income increased $10.8 million to $57.3 million largely due to the three acquisitions. At September 30th, our GDSO portfolio consisted of 301 company-operated stores, 259 commission agents, 239 lessee dealers and 790 contract dealers for a total of 1,589. This compares with the total portfolio of 1,435 at the end of the third quarter of 2017.

In our Wholesale segment, the gasoline and gasoline blendstocks product margin decreased $24.8 million to $5.6 million, primarily due to less favorable market conditions in gasoline and gasoline blendstock. During the third quarter of 2017 our product margin benefited from weather-related supply disruptions not present during the third quarter of 2018. Product margins from crude oil improved $0.8 million benefiting from slightly lower railcar lease expenses, but also the termination in Q3 '17 of the pipeline connection agreement with Tesoro. Margin was adversely affected by the expiration in June 2018 of our take or pay contract with one particular crude oil customer.

Product margin from other oils and related products was down $9.4 million to $5.2 million primarily due to less favorable market conditions in distillates and residual oil. In addition, during the third quarter of 2017, our product margin in residual oil benefited from weather-related supply disruptions not present during this year's third quarter.

In our Commercial segment, product margin increased $0.5 million to $5.5 million, primarily due to an increase in bunkering activity.

Total volume increased by about 396 million gallons to 1.5 billion gallons. Volume in our Wholesale, Commercial and GDSO segments increased approximately 344 million gallons, 38 million gallons and 14 million gallons respectively.

CapEx in the third quarter was approximately $16.3 million, consisting of maintenance CapEx of $8.6 million, including $7.6 million related to our retail gas stations and convenience stores and expansion CapEx excluding acquisitions of $7.7 million which is also related primarily to our gas stations and stores.

Year-to-date maintenance CapEx was $25.9 million while expansion CapEx excluding acquisitions was $17.6 million. For the full year of 2018 we expect maintenance capital in the range of $35 million to $45 million versus our prior estimate of $40 million to $50 million. We continue to expect expansion CapEx in the range of $30 million to $40 million.

Turning to our balance sheet. As of September 30, we had total borrowings outstanding of $651.9 million under our $1.3 billion facility. During the quarter, borrowings under our revolving credit facility increased approximately $59 million to $244.2 million, reflecting the acquisitions of Champlain Oil and Cheshire Oil for $138 million and $34 million respectively, including inventory. This was offset in part by net proceeds of $66.4 million from the issuance of Series A preferred units.

Borrowings under working capital facility increased approximately $110 million primarily due to an increase in inventory attributed to both volumes and to price. Leverage is defined in our credit agreement as funded debt-to-EBITDA was approximately 4.5 times at the end of the third quarter.

Turning to guidance, as Eric noted, we are increasing the lower end of our full year 2018 EBITDA guidance by $5 million. Full year 2018 guidance is now $195 million to $215 million compared to our prior range of $190 million to $215 million.

As a reminder, this guidance excludes any gain or loss on sale and disposition of assets and any goodwill and long-lived asset impairment charges as well as the one-time $52.6 million gain recognized in the first quarter of 2018 from the extinguishment of the contingent liability related to the Volumetric Ethanol Excise Tax Credit.

Before we go to Q&A, I wanted to let you know that we will be participating in upcoming investor conferences. Next week, we will be hosting one-on-one meetings at the RBC Capital Markets Midstream Conference in Dallas. In December, we will be at the Bank of America Merrill Lynch Leveraged Finance Conference in Boca Raton and the Wells Fargo MLP Symposium in New York City.

With that, Eric and I will be happy to take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Ben Brownlow with Raymond James.

Ben Brownlow

On the Wholesale segment, the volume growth there of close to 60% year-over-year and I understand there were some supply disruptions last year but that was still the highest third quarter volume since 2014. Can you comment on the drivers there? And then also kind of balance that with a discussion around your pricing strategy? Because at the same time given the record low margin in that segment. Just trying to understand the puts and takes there?

Daphne Foster

Sure. Good morning, Ben, it's Daphne. I think in terms of the volume, the majority of the increase in volume in the gasoline and gasoline blendstocks segment was really due to additional tankage we took at the beginning of the year for our blending operation which essentially allowed us to take advantage of blending when markets incent that and basically to generate more volumes. So that's the primary reason for the increase in volume.

In terms of product margin, I think we’ve sort of continued to reiterate we have less favorable market conditions this year than last year. Certainly as a reminder, we had the Hurricane Harvey experience, Hurricane Harvey in August of last year. And that really prompted a significant increase in prices as supply was curtailed. And that compared to 2016 third quarter, product margin in 3Q '17, gasoline and gasoline blendstock increased about $9 million. However, relative to our expectations for that quarter, it increased much more than that. So what we're saying here now is really, like temperature, we don't budget for normal weather, and we don't forecast either for weather-related or other infrastructure-related disruptions. So while the quarter did come in under everyone's expectations, it didn't come in under as much relative to our expectations.

Ben Brownlow

Okay, that’s helpful. And is it fair to assume that embedded in that fourth quarter guidance of $47 million to $67 million implied, is it fair to assume that you’re baking in improved contribution sequentially for the Wholesale segment?

Daphne Foster

Yes, I mean we're not going to give guidance on the specific segment and we haven't done that in the past. But certainly we are very comfortable having increased the floor of our guidance. And I made a comment that we’ve always seen swings quarter-to-quarter and some of it which can just be timing and I’ll give you an example. For instance if prices change, variability can be caused by the marks at the end of the quarter and that can impact your hedge and your inventory values, the impact of which can be just the timing.

Ben Brownlow

Okay, great. And one last one from me and I'll jump back in. The OpEx growth, can you quantify or sort of give us an idea of what the M&A contribution year-over-year was that 19% growth rate? And just thinking forward just kind of given that there is obviously going to be some seasonality. But is it fair to think about kind of $80 million to $85 million run-rate quarterly going forward?

Daphne Foster

Okay, so you’re talking about OpEx. So OpEx in the quarter, yes, the $84 million. I would say if you look at relative to last quarter not last year, it's up from $76 million or so, and that does not reflect the full year -- I mean a full quarter of those acquisitions, we purchased them on July 17th to July 24th respectively. So OpEx could be a little bit light, but not materially. The only comment I’ll make is that credit card fees are very difficult to project because obviously it's not only based on volume, but it's also based on price.

Ben Brownlow

Okay, great. Thank you.

Operator

Thank you. [Operator Instructions] Our question comes from the line of Ned Baramov with Wells Fargo.

Ned Baramov

Good morning. Thanks for taking the question. It's another one on your wholesale operations. So some of your peers I think were able to sign short-term real contracts out of the Bakken given wide differentials. So I was just wondering if you could talk about any commercial successes you may have had on this front recently?

Mark Romaine

Yes, good morning. This is Mark. Obviously the crude market has -- we've seen some pretty significant volatility over the last several months. And discounts in certain markets are widening pretty significantly. So on paper it looks like there is opportunity and I think there are certain pockets of opportunity. I think one of the challenges and part of the reason why the diffs the way they are, are due to really kind of transportation related challenges both on the railroad and the railcar side of the business. So, we are actually -- we are pursuing opportunities. We still have assets that we think are strategic to the marketplace, and viable in today's business. So, we are looking at opportunities around that. We didn't have anything in Q3 that would have allowed us to capture any of that, but I think we are pursuing whatever we can around that space.

Eric Slifka

Hi, it's Eric Slifka. What I would say as well and I spoke a little bit about it I think the last call, you can -- the feel of the market is sort of very different particularly as it relates to crude because the pricing spreads and discounts are so large. And what I would say is the market just feels a lot more active and there's a lot more inbounds. And you can't cut your money until anything is done, but it just feels really busy. And so we're fielding a lot more inquiries on all of the assets that we have that are related to crude.

Ned Baramov

Okay, that's helpful. And I guess last quarter you talked about some of those potential third-party opportunities there. Are there any capital requirements associated with these opportunities? I think there are. Are they already reflected in your growth CapEx guidance for the year?

Eric Slifka

What I would say is, if there's any capital required, we're going to try and get that to be paid in fashion by a secure contract on the other side of it, right? So, we're going to look at it. We're going to be very cautious about how we do it. And then obviously we're going to have to talk about what the best way is to finance it.

Mark Romaine

Yes. That being said, though, I think there are opportunities in the marketplace that won't require CapEx. I think Eric is obviously right there. If there's anything -- if there’s any upside that we can participate or capture beyond what our facilities can do today, it'll be done so with -- backed by a contract and -- but it’s not to say that we have to spend money to capitalize here.

Eric Slifka

And these assets have run before from the West Coast to the Bakken to even East Coast. They've all run crude through it and they've all run material quantities of crude through it as well. So the assets are all capable the way they are structured today.

Ned Baramov

Got it. And last one from me, maybe if you can provide an update on your plans for the IDRs? I agree that cash flow is not a -- sorry, cash distributions for IDRs is not a significant burden at this point but -- and does not require immediate action. But I guess it remains a structural issue and the sector is moving quickly to address it. So any thoughts on this would be helpful?

Daphne Foster

Yes I’d just say we always evaluate all options and opportunities just to have maximized returns from both the business and financial and really also a structural standpoint?

Eric Slifka

I'll add a little to that. I mean essentially there is cross-ownership between the unit and between the general partner. And so the interests are to figure out how to get good deals done to get the returns. And that's what we're focused on.

Ned Baramov

Got it. That's fair. That's all I had. Thank you.

Operator

Our next question is from the line of Will Hardy with RBC.

Will Hardy

Eric, could you perhaps talk a little bit about your West Coast or Portland assets? I haven’t heard much about that. And then is there anything going on with the assets that you had in the Bakken with the pick up and what's going on there. Just kind of address those two things?

Eric Slifka

Yes I mean broadly what I would say is, is there’s A, been a lot of inquiries; B, the discounts are broad enough that even we would look to maybe take position on some of that. I just think and feel like something is going to take place there just because the spreads are screaming for things to happen. We continue to use it on the West Coast as an ethanol transload site. But I think there is a possibility that that could swing back to crude, right?

Will Hardy

Appreciate it. Thank you.

Operator

The next question is from the line of Mike Gyure with Janney.

Michael Gyure

Yes, can you guys talk a little bit about the GDSO segment improvement at the margins? I think you noted the combination of the acquisitions is driving that. But I guess specifically maybe related to the acquisitions, where you seeing the benefit, is it purchasing power, is it integrating the operations in your platform? I guess what's driving the benefits there?

Eric Slifka

Yes. I could barely hear you I'm sorry. Could you speak up and just ask the question again? Sorry.

Michael Gyure

Yes, sorry about that. In the GDSO segment, some of the margin improvement you note is related to the acquisitions. If you could talk about what specifically is driving that integration, is it purchasing that’s different, is it running the operations that’s different?

Eric Slifka

Yes I mean, what we're -- what we think we're particularly good at, because we have size and scale in the marketplace, as most of the smaller distributors have these contracts with multiple suppliers and they're not very large with them, and we're large with almost every supplier. And so we have contracts, purchase contracts with these suppliers. We can look at it, we pretty much know exactly what we can save when we go and look at an acquisition in terms of fuel. And then we also look at the supply, it goes into the C stores and I'd say we're not as big in that business but we're bigger than most of the guys that we're buying. So we think we could streamline that cost structure as well.

Michael Gyure

Great. And then maybe one for Daphne on the guidance, you mentioned weather -- I guess again can you talk about how you do or don't factor weather into your guidance?

Daphne Foster

Yes, we always look forward to a normal year. So that’d be normal weather and no significant disruption. So that's how we forecast, that's how we budget. And then obviously if it's particularly cold in the fourth and the first quarter that's helpful and if it’s particularly warm, that’s less helpful.

Michael Gyure

Great. Thank you.

Operator

Our next question comes from the line of Selman Akyol with Stifel.

Selman Akyol

Thank you. First of all, can you just say how much the acquisitions contributed to EBITDA for the quarter?

Daphne Foster

We haven't broken those out and I will say that when we moved guidance, the ceiling of guidance last quarter, we were doing that to reflect in part the acquisitions but also we contemplated that we would have one-time transaction costs in it and at that point they were approximately $4 million. And you saw on the quarter, they came in about $3.7 million. So I think that's all I can say about that. I'll say that we are pleased with the performance of the acquisitions to-date.

Selman Akyol

Alright. And then can you just kind of talk about additional M&A and your outlook for that?

Eric Slifka

So on the retail side, I would say it continues to be very busy. We're seeing lots of transactions. And what I think I said over the last call is that, we're comfortable with what we're paying because we're not winning every transaction. And so it continues to be busy, and there’s a pretty full pipeline.

Selman Akyol

Okay. And then last one. Any initial thoughts on 2019?

Eric Slifka

As it relates to?

Selman Akyol

As it relates to guidance, anything like that you'd like to say?

Daphne Foster

Yes. No, we typically put out guidance for ‘19 or for the year at our call for the K. So we won’t be putting out guidance yet.

Selman Akyol

Thank you, Daph.

Operator

The next question is come from line of Lin Shen with HITE Hedge Assets Management.

Lin Shen

Hey, good morning. Thanks for taking the call. One of your peers recently talked about in their call, that their convergence of the sulfur specification in their Northeast heating oil market, limiting their blending opportunity. Also they also see a less attractive distillate market to purchase. And they think they are going to see their challenge to the rest of the year. I'm just wondering, do you see the same thing in the market now?

Mark Romaine

Yes, good morning. It's Mark. Yes, the sulfur spec has changed on heating oil in New England. So that is the fact. And we're all required to meet the same specs. I don't -- we don't see it as a major impact to our business. I mean it does limit some of the blending opportunities that we may have taken advantage of in the past. But the move from 500 to 15 PPM is -- or the move down to 500 PPM was meaningful, 515 we don't see as a big deal. So it certainly provides less opportunity, but I don't see that as a main driver for us. And then with respect to Q4, our expectation is that Q4 will be a normal quarter for us from a distillate standpoint. So I don't necessarily see any changes there.

Lin Shen

Okay, great. Thank you.

Operator

Thank you. That concludes our Q&A. and I like to turn the floor back to Mr. Slifka for closing comments.

Eric Slifka

Thank you for joining us this morning. And we look forward to keeping you updated on our progress.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.